Friday, 13 January 2017

Indians under a mountain of debt

It’s not just India which is under a mountain of debt but also Indians who are rapidly shedding inhibitions towards taking loans. With the rampant spread of credit culture, the average Indian is paying around one-fifth of his or her monthly salary towards repaying debt.

For aspiring Indians, debt is no longer a bad word. From white goods to kids’ education, loans are increasingly a favoured option. Until few decades back, households mostly believed in saving for big ticket expenses. Today, they would rather take a loan for any expenditure; be it a a microwave oven, an LCD TV, a car, house and even education. The huge discounts and offers being given by e-commerce firms and consumer product brands are supporting the trend. The phenomenon has been aided by the spread of microfinance institutions and self-help groups in rural India and easy EMI schemes in urban areas.

The off-take of credit has been going up due to rising disposable incomes, increasing consumerism and easier access to credit. Real estate and consumer durables have led the growth in credit. In the last few years, high value goods have been coming under attractive schemes. A lot of credit is being used for creating assets like household gadgets and appliances. Some credit is also being taken for education of children, both in India and abroad, and that is an investment than debt.

Some of the biggest loans are taken in the real estate and auto sectors. About 70 per cent of cars are bought on EMIs. The loan phenomenon will increase further due to demonetization. The rising credit culture would have been a matter of concern had it been used for discretionary spending such as travel and vacations which is just blowing up the money. Creating credit is not necessarily bad especially in cases where it is also improving life style.

It is asset-based credit and helping create more liquidity, which is good for the economy. While living on loan seems to be gaining currency, there is little worry about payment defaults. There is an increasing level of credit discipline among rural people. The default rate is much lesser in consumer credit as against corporate credit. This is because a retail customer has to build his/her credit score, and multiple validation takes place before credit is extended. A lot of assets are given on mortgage, reducing risks.

My View:
The rising debt culture is OK in stable economies without any disturbances and growing steadily year after year. In case of disturbances or economic contractions, who ever is saddled with loans and loses job or bulk of income, will simply become a pauper on the street. All his equity in this loan based purchases will simply vanish. With assets vanished, credit scores below mark and saddled with liabilities, one will have to live on family assets or charity.

For single earners in the family with meager family assets & support and risk aversion people , staying away from credit based purchases and building assets base for some time is better. In this leveraged world, money and its manipulations are OK for high net worth people who can absorb shocks but people with fragile asset base and dependent on monthly earnings staying away from loans & EMI's is better, for peace of mind.

While it is fascinating to buy gadgets & things with least payment and pay monthly EMI, and if one computes the total interest outflow, over two decades, due to credit based several purchases, it works out to be mind boggling amounts. The mortgaged housing & car loans carries moderate interest charges. The unsecured personal loans, which carry higher interest rates. Credit cards usage is OK for convenience of payments and very short term credit purchases. But if used for medium/long term credit purchases, the interest charges are worse than personal loans.

Staying away from credit and saving 25-40% of earnings, is worthwhile for peaceful living.

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